The good news for Alibaba investors is that two of those three catalysts have worked out well. The bad news is that the third has been an unmitigated disaster.
Jack Ma and the Chinese Communist Party (CCP) have totally botched the Ant Financial IPO. Fortunately for Alibaba investors, the market has completely overreacted to the news.
The Ant-related Alibaba sell-off is a great buying opportunity for long-term investors. And it’s in China’s best interest to demonstrate to the world they can trust Chinese investments.
Bullish Catalysts for Alibaba Stock
Let’s discuss the good news for Alibaba first. Joe Biden won the US election. More importantly for Alibaba investors, Donald Trump lost the election.
Trump made his trade war with China one of the centerpieces of his administration. His animosity toward China coupled with his unpredictability created a cloud of uncertainty for Chinese stocks like Alibaba for four years.
It doesn’t even matter whether or not Biden will be “soft” on China. Getting Trump out of the White House is bullish for Alibaba and other Chinese stocks.
The next bullish catalyst in the past couple of weeks was Alibaba’s third-quarter earnings. The company reported non-GAAP diluted earnings per share of $4.83 in the most recent quarter, topping consensus analyst estimates of $2.08.
Revenue for the quarter was up 30% to $22.83 billion, slightly missing analyst estimates of $23.19 billion. Alibaba’s cloud revenue was up 60%, far surpassing the growth rates of US cloud leaders Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
The cherry on top of a strong quarter for Alibaba was its blowout Singles’ Day numbers. This week, Alibaba reported a record $74.1 billion in Singles’ Day gross merchandise value, nearly double last year’s $38 billion in sales.
For perspective, Alibaba generated about seven times the $10.4 billion Amazon generated during its 48-hour Prime Day sales event this year.
Ant IPO Debacle
Despite all the good things mentioned above that should have a positive impact on the Alibaba stock price and its long-term business outlook, the stock has taken a major beating in the past couple of weeks. It all started with Jack Ma opening his mouth.
Jack Ma was a co-founder of Alibaba and the founder of Ant Group, which is 33% owned by Alibaba.
Prior to the Ant IPO, Ma said in a speech that Chinese banks operate with a “pawnshop mentality.” First, most major Chinese banks are state-owned. In China, the “state” is the CCP, of which Ma is a member. But Ma apparently decided to criticize the CCP just days before the Ant IPO, which was on track to be the biggest in the history of the world.
Ma should have known better.
The CCP responded by announcing brand new rules on micro-lending in China and promptly pulling the Ant IPO when the company didn’t immediately comply with those rules. The CCP then followed up by proposing new antitrust regulations that could impact pricing, payment methods and data used by Chinese tech companies.
The Chinese government felt Ma was out of line with his comments. Ma made a power play with his criticism, and the CCP felt they needed to put him and other Chinese tech entrepreneurs in their place.
But this petty power drama has already wiped more than $280 billion in value from Chinese tech companies, including Alibaba. It has also further tarnished the already pretty horrible reputation Chinese stocks have on the global market.
The CCP should have known better.
What It Means for Alibaba Stock
At the end of the day, I believe this political bickering in China won’t result in many major disruptions to Alibaba’s business. It’s not in China’s best interest to cripple some of its biggest economic growth engines. At the same time, Ant Group’s reputation has been tarnished, and new regulations could have a significant impact on its business.
The Patriarch Organization estimates Ant’s valuation could drop from around $300 billion to $150 billion by the time it goes public, likely in 2021.
In other words, the value of Alibaba’s 33% stake could drop by $50 billion. Fortunately for Alibaba investors, the company’s market cap is already down by more than $120 billion so far in November. In other words, Alibaba stock seems to be pricing in that Ant is now worthless. Of course, that idea is ridiculous considering Ant is China’s largest digital payment platform.
All this drama surrounding Ant, Ma and the CCP will ultimately blow over. It’s in all parties’ best interest for Ant, Alibaba and China to succeed on the world stage. In the meantime, I agree with Jim Cramer’s take on the Alibaba sell-off.
“I am pounding the table to buy Alibaba.”
On the date of publication, Wayne Duggan held a long position in BABA.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.